21 May 2020
- We have turned bullish on overall supply conditions. Forward supply conditions continue to point to uptick in supply availability. In fact, this has already been gradually picked up by our implied imports indicator, which is detecting higher inflows of ore into China in the short term. However, this increase in expected inflows are negated by tighter domestic mines turnaround rates i.e. domestic production is slower in replenishing its offtakes. In fact, from our assessment of the Days of Consumption (DoC) of the available inventory levels across the entire supply chain in China, the result continues to point to further tightness. These are all price positive developments.
- Our short-term demand view however has weakened, and we are bearish. Mill margins continue to come under pressure as mills face increasing difficulty in passing the higher costs downstream. While profitability has come under pressure, they remain overall positive. This explains the increasing steel rates. However, our re-stocking index indicator suggests that the marginal preference for imports is gradually diminishing, which would add some near-term downward pressure on prices. The strong uptick in prices is very likely to have curtailed the buying interests of marginal buyers.
- We have turned bullish on overall macroeconomic conditions. Our FX model turned bullish, as the ongoing weakness in the dollar has helped to improve the overall purchasing power of key IO importing countries. Notably, we are also picking up improve short-term credit conditions which would help to keep short-medium term demand supported. As iterated in our earlier reports, we continue to be constructive on short-term downstream construction demand, which can be seen by the persistent drawdowns in steel inventory of late.